hot hand fallacy

NBA legend and recreational gambler Charles Barkley is presented with the following hypothetical on ESPN radio: You are winning big at the poker table when a beautiful woman sits down next to you. “Do you stay with the hands or do you leave?”

Barkley: “Bro, gambling is so fickle, I love to gamble, when you on roll, you ride it out, bro. First of all, you don’t even let people sit down with you that you don’t know. I don’t play with random strangers.”

The Monkey Cage cites a paper by Jonathan Guryan of the Graduate School of Business, University of Chicago, and Melissa Kearney of the University of Maryland that tries to explain the following phenomenon:

In the week after a large-prize winning ticket has been purchased at a given store, that store experiences a 12 to 28% relative sales increase in lottery ticket sales. This increase fades over time, but the store’s lottery ticket sales remain elevated for up to 40 weeks. This effect increases with the size of the jackpot and with the economically disadvantaged proportion of the population.

What’s interesting about this finding is that previous research has shown that people decrease the amount of money bet on certain lottery numbers after those numbers come up winners. So they go to the store that sold the last lottery ticket, but don’t pick any of the numbers from the last jackpot? How can these apparently contradictory findings be resolved? Guryan and Kearney come up with an idea they call the “lucky store effect” in which “consumers erroneously increase their estimate of the probability a ticket bought from the winning store will itself be a winner.”

About

The Nudge blog is the online companion to Richard Thaler and Cass Sunstein’s “Nudge: Improving Decisions About Health, Wealth, and Happiness.” Here you’ll find much more about nudging, choice architecture, libertarian paternalism, and many other terms you won’t read about in standard economics books.

Cass Sunstein is currently the Administrator of the White House Office of Information and Regulatory Affairs and has no affiliation with the Nudge blog.

The Nudge blog is edited by John Balz.

Tell us about a nudge

The possibilities for great nudges are everywhere. For a list of favorites from the book, check out our dozen nudges. We invite readers to send their own nudge suggestions to nudgeblog@gmail.com.

What is Choice Architecture?

Decision makers do not make choices in a vacuum. They make them in an environment where many features, noticed and unnoticed, can influence their decisions. The person who creates that environment is, in our terminology, a choice architect. The goal of Nudge is to show how choice architecture can be used to help nudge people to make better choices (as judged by themselves) without forcing certain outcomes upon anyone, a philosophy we call libertarian paternalism. The tools highlighted are: defaults, expecting error, understanding mappings, giving feedback, structuring complex choices, and creating incentives.

For a user-friendly introduction to choice architecture, check out this paper.